Starbucks’s valuation shouldn’t be bigger than McDonald’s: analyst

David Trainer, president of New Constructs Inc. says that a valuation that implies revenues that will be “greater than McDonald’s within 10 years” makes Starbucks “dangerous” at its current prices.

Appearing on the “Danger Zone” segment of MoneyLife with Chuck Jaffe, Trainer said that Starbucks
/quotes/zigman/20720/quotes/nls/sbuxSBUX has through the years “been greatly overvalued and greatly overvalued … and it has now entered back into one of those stages where, in my opinion, it is pretty terrifically overvalued, and people are investing in this more because it’s a popular stock than because it’s a smart investment.”

Typically, New Constructs’s research focuses on bottoms-up stock analysis, looking for areas in the company’s perceived value and its real worth.

Trainer said that the issue with Starbucks is less in the specifics of the company’s filings than it is in comparing the stock to the competition — particularly McDonald’s
/quotes/zigman/233369/quotes/nls/mcdMCD — because that’s where there is “a glaring disconnect between what the value of the business is and what it ought to be.”

McDonald’s is a “terrifically profitable” business model “on a scale five times larger than Starbucks today,” Trainer noted. “Starbucks is never going to unseat McDonald’s as the king of the fast-food retail world, but that’s what the valuation of Starbucks implies today.”

Running Starbucks through a discounted cash-flow model, Trainer said that justifying the current share price of roughly $48 implies that Starbucks “is going to be able to grow its profits 15% annually for the next 10 years, a big number for any company ….”

“That means people believe that Starbucks revenues are going to be greater – almost 80% greater in 10 years — than what McDonald’s are today,” said Trainer. “That, to me, seems pretty absurd.”

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